Pre-Salt: Capitalizing on Growth
Opportunities
Giovani Loss
Thursday, June 17th, 2010
2010 Brazil Oil & Gas Seminar
Brazilian-American Chamber of Commerce, Inc.
June 2010
Agenda
1. Brazil – Offshore E&P
2. Brazil – Pre-Salt
3. Brazil – Developments in the Oil & Gas Regulatory
Framework
4. Brazil – Current Status of the Industry and
Investment Opportunities
Brazil - Offshore E&P
• Offshore E&P Industry
 Nowadays, nearly 30 per cent of the world's oil production
comes from offshore targets
 Deep and ultra-deep offshore exploration - 75% of the
economically producible volumes of oil and gas identified
since 2003
 The world's best deepwater prospects are in the Gulf of
Mexico, West Africa and Brazil (the “Golden Triangle”)
 Significant developments also occur in North Africa (Libya,
Egypt and Algeria) and Asia (India and Indonesia)
Brazil – Offshore E&P
• Why Brazil is a leader in Offshore E&P?
 Big coast + Surveys undertaken in the 1960s - the
Amazon basin did not hold big oil reserves
 PB started investing in offshore technology in the 1960s
 PB to invest USD 4 billion in offshore R&D through 2013
 PB operates 22% of global deepwater production and
18% of all operating vessels
 Floating Production Systems operators (all contracted):
1 – PB – 45 FPSs
2 – Statoil – 15 FPSs
3 – Shell – 15 FPSs
INDEX
1. Brazil – Offshore E&P
2. Brazil – Pre-Salt
3. Brazil – Developments in the Oil & Gas Regulatory
Framework
4. Brazil – Current Status of the Industry and
Investment Opportunities
Brazil – Pre-Salt
• What is the Brazilian Pre-Salt area?
 Reserves of up to 100 billion barrels
 High quality light oil
 200 to 300 km from the coast
 5 to 8 km below the sea bottom
 Water depths over 2 km
 Total area: 112,000 km2
 Total area under concession: 41,000 km2 (28%)
Brazil – Pre-Salt
• Technological Challenges
 Long distance to the coast
 Floating Production Units and tankers anchoring in
ultradeep water
 Deviation of wells in the salt zone
 Presence of CO2 (corrosive)
 Connections with risers under high pressure
 Gas pipeline larger than 18” in water depth of 2,200 m
Brazil – Pre-Salt
• Financial Challenges
 Exploration of Pre-Salt requires massive investments from
E&P Companies and Service Providers
 USD 600 billion over the next 30 years
 Petrobras to invest USD 174 billion through 2013
 Brazil to produce 3.4 million barrels per day by 2020
Brazil – Pre-Salt
• Commercial and Legal Challenges
 Sharing of infrastructure required (complex legal
structures – multiple consortiums involved)
 Local content (currently around 75% - required in
contract)
 Lack of equipments and experienced humam resources
(long term contract – strong default clauses)
 Financing products to be developed (guarantees)
 New technology to be developed (submarine and subsea –
strong patent control)
 Natural Gas: Shale Gas (FLNG)
Brazil – Pre-Salt
• O&G is the fastest growing industry in Brazil
 1997 – 2.8% GDP
 2008 – 10% GDP
• Number of O&G Service Providers in Brazil
 2000 – 210 companies
 2008 – 1761 companies
 2020 – Expected 20% GDP for oil & gas industry
 Brazil expected to become 6th largest oil producer in the
World by 2030
INDEX
1. Brazil – Offshore E&P
2. Brazil – Pre-Salt
3. Brazil – Developments in the Oil & Gas
Regulatory Framework
4. Brazil – Current Status of the Industry and
Investment Opportunities
Brazil – Developments
• New Regulatory Framework:
Natural Gas
 Natural Gas Law issued on March 2009
 Decree regulating the industry to be issued in 2010
Oil
 Pre-Salt Bills under Discussion – Approved in Senate
 Rules should remain the same for areas that are not
considered part of the Pre-Salt or strategic
Brazil – Developments
•
Natural Gas Law:
 Creates a bid system for natural gas projects
 allocates government funds to support certain projects
 establishing stronger competition rules regarding open
access to existing pipelines.
•
Natural Gas Decree: secondary markets, criteria for public
tenders, curtailment of supply and reversion of assets
Brazil – Developments
• Pre-Salt Bills - Basics:
 PSA Regime for the Pre-Salt area and other strategic areas
 Petrobras as sole operator (minimum of 30% stake in all
Pre-Salt fields), except in the case of unitization, which
may be negotiated
 Assignment of oil and gas rights in the adjacent areas with
capital injection into Petrobras (almost a concession
regime)
 Creation of PetroSal and Oil Fund
 PetroSal will participate in the operating committee,
electing half of its members, including its chair
Brazil – Developments
• Main Brazilian Government Objectives:
 Increase control over production
 Increase control over commercialization
 Increase government take
 Enforce local content rules
 Avoid Dutch disease
Brazil – Developments
• PSA Regime:
 Applied in many large oil producting countries, such as
Angola, China, India, Lybia and Nigeria
 Will not increase control over production – production
program is established during development phase,
changes may reduce performance of the project
 Will increase control only over commercialization of the
Government share of the oil
 May not increase government take as expected: costs with
management of PetroSal should be very high
Brazil – Developments
• Petrobras Sole Operator:
 Government apointing operador is not so uncommon,
some countries that apply this rule are: Nigeria and
Norway
 May result in inefficiencies as operator can’t be removed
 May reduce government take: companies may apply a
discount rate to investments in the Pre-Salt considering
bureaucracy
 Will reduce incentives for other companies to invest in
natural gas transportation
Brazil – Developments
• Assignment of oil and gas rights in the adjacent areas:
 Capitalization will provide cash for Petrobras to invest
 Vested rights under concession contracts will be respected
 Assignment is similar to Concession - No economic
imbalance between companies under different regimes
 Faster unitization process - as Petrobras is operator in
most licensed areas, less issues to be negotiated
Brazil – Developments
• PetroSal:
 PSA requires the creation of a 100% National Oil Company
 Government final word over operations is not so
uncommon, some countries that apply this rule are: China
and Indonesia
 Investors may apply a discount rate, as PetroSal control
over operations may bring inefficiencies
INDEX
1. Brazil – Offshore E&P
2. Brazil – Pre-Salt
3. Brazil – Developments in the Oil & Gas Regulatory
Framework
4. Brazil – Current Status of the Industry and
Investment Opportunities
Brazil – Status & Opportunities
• Current Status of the Pre-Salt Industry:
 Technical Status:
Use of current existing technology
Starting studies on new technologies
Pilot production to bring cash flow and to test technology
 Commercial Status:
E&P Players looking for financing alternatives (M&A, IPO, but
not to project finance yet)
Service Providers looking for finance alternatives and to
invest in new technologies (M&A, IPO, Project Finance,
FDIC, FIP)
Increase on local content driven by Petrobras
Brazil – Status & Opportunities
• Opportunities for E&P Companies:
 Areas under concession contract available for farm-in
because companies may need cash (Devon Deal and
Peregrino Deal)
 There are non Pre-Salt areas and non-strategic areas that
may be available for investment under the concession
regime in the near future – 11th Bid Round to happen in
2010
 PSA with private investors should be the most applicable
regime, because Petrobras needs financings
Brazil – Status & Opportunities
• Opportunities for Service Providers:
 Development of fields will require highly qualified suppliers
 Local Content rules will require investments to be made in
Brazil
 Government of Brazil should develop incentives for service
providers (BNDES, tax breaks, labor incentives, FDIC, FIP)
Ex. fund for 28 rigs.
 No matter what will be the regime the acquisition of goods
and services should grow considerably
Brazil – Status & Opportunities
• Opportunities for other Players:
 Banks to finance big service providers contracting with
Petrobras (rig, FPSO and corporate finance)
 Banks to finance operations after Pilot projects (lower
technical risk, cash flow)
 Banks to finance development of service providers
industry in Brazil - FDIC and FIP
 Private Equity funds to invest in service providers and use
exit strategy (bring them to public market or sell)
THANK YOU!
Giovani Loss
giovaniloss@mattosfilho.com.br
Presidente Wilson 231, 4th floor
Rio de Janeiro, RJ, Brazil